Before you retire, you may be focused on growing your assets to help provide for you in your later years. Once you retire, that strategy should shift from growth to preservation.
You may not need as much income in retirement, but that doesn’t mean you will always have fewer expenses. You may have to deal with rising healthcare costs, market volatility, or personal liability. Even if everything goes great, you may live longer than you expected and need to keep the money flowing.
If you want the most from your retirement, now is the time to start planning. Proactive asset protection helps you reduce unexpected costs by planning for them. It’s an important complement to your retirement and estate planning, by making sure that you have the assets to cover your expenses and a reasonable path to provide for your legacy. Follow these five tips on how to protect your assets in retirement, with ways to maximize your advantages and manage your risks.
Five Tips to Protect Your Assets in Retirement
The right asset protection strategy may be simple or complex, depending on your individual circumstances. For best results, research your options and responsibilities in these five areas.
1. Maintain Adequate Insurance Coverage
No one likes getting caught off-guard by a big expense like roof damage, which is why insurance is such an important aspect of asset protection. You get insurance to protect your home, your health, your vehicles, and other assets. When disaster hits, the type of coverage you have affects how much the insurance company will pay to set things right.
Take a moment to evaluate the types of coverage you have for these categories:
- Liability: Protects you in the event that something happens on your property
- Umbrella: Provides extra liability protection beyond your homeowners or auto insurance
- Homeowners: Covers damage to your home from various causes
- Auto: Provides coverage in case of an accident or vandalism
Insurance can get confusing, so it’s important to make sure you understand what your policy covers. Homeowners insurance policies are usually split by replacement cost value (RCV) and actual cost value (ACV). RCV covers the entire cost of replacement, while ACV only provides money for the depreciated value of the asset.
At least once a year, you should talk with your insurance agent about your coverage and make sure it fits your current lifestyle. For example, if you put an accessory dwelling unit as a guest house for your kids and grandkids, you may need to increase your coverage for the property.
2. Structure Assets Thoughtfully
Although retirement might seem like a time when things are less likely to change, it’s still important to be able to adapt. Your financial situation will shift as you get older, and you will need to structure your assets to accommodate those changes.
Start by looking at who owns which assets, and how the type of ownership affects your estate. The difference between individual vs. joint ownership is more than just who can sell or make decisions about the property. If you share a property or other assets with someone else, the type of joint ownership can affect who gets what portion of the asset, and whether you’ll need to sell it to pass it on.
When you work on estate planning, be sure to discuss that asset structure. For example, if you want to pass a home you individually own to your children, but you want your spouse to be able to live there for the rest of their life, your estate planning must spell that out.
As the years progress, you should review your existing accounts and update them. Remember that legal challenges depend on documentation, not feelings. So even if you meant to list your current spouse as beneficiary on a life insurance policy you bought before you got married, they may not receive it if someone else is currently listed. If you have old accounts that you no longer use, close them to prevent unauthorized access.
3. Maximize Protected Retirement Accounts
As you research how to protect retirement savings, you should know that retirement accounts provide you with a range of benefits, including creditor protection. You should take advantage of these benefits to provide you with additional asset protection. Creditor protection means that creditors cannot seek to drain a person’s retirement accounts, for a lawsuit, bankruptcy, or other liability.
This protection exists to provide some safeguard for your money after you retire, but it depends on the type of account. Employer-sponsored plans, like a 401(K), usually have unlimited coverage. IRAs have limits on coverage. Make sure you understand the limits on your retirement funds.
When you plan retirement distributions, be strategic to maintain protections and provide for your long-term goals. Other investment accounts that you use during retirement may not have the same protections. Talk with your financial advisor about the best way to make withdrawals while providing for the future.
4. Separate Personal and Business or Investment Risk
If you own a business or a decision-making role in a company, you may need to protect your personal assets. Many retirees decide to start a business or buy investment properties as a source of side income, not realizing that business liability can affect their personal assets.
Sometimes, bad things happen, and a person presses a lawsuit on your business interests. While your retirement funds may be exempt from these lawsuits, your home and other assets may not. Separating business risk from your personal life can help you preserve these assets.
When you start a business, take steps to maintain a financial and legal separation. Use a separate financial account for rent collection, revenue, and business expenses, and consider forming an LLC to restrict your personal liability. This will help you maintain control over your business without increasing your personal exposure.
5. Plan for Healthcare and Long-Term Care Costs
As you get older, your costs for healthcare will almost certainly go up. Research shows that out-of-pocket costs for healthcare rise sharply in retirement. While you’ll probably have access to Medicare, it may not cover as much as you expect.
Medical bills can reach hundreds of thousands of dollars to treat a single condition, depending on your coverage and the severity of the issue. If you’re not bringing in a lot of income, such expenses can eat into your retirement funds or force you to sell assets you planned to pass on.
Even if you’re in great health and fitness now, that may change in the next 20 years. To avoid unexpected, major gaps in coverage, consider choosing the most comprehensive plan you can reasonably afford.
When you look at your potential retirement expenses, factor in ongoing healthcare costs, and possible long-term care needs over time. Planning ahead can help you fit your healthcare needs into your broader asset protection strategy and legacy goals.
Important Considerations and Common Misconceptions
Perhaps unsurprisingly, many people misunderstand what asset protection is and how best to use it. These misconceptions can lead to a range of problems, such as:
- Planning to protect assets too late to gain strategic advantages
- Shifting asset dynamics reactively, instead of planning ahead
- Failing to account for legal or regulatory changes that may put the plans out of compliance with laws
- Only including major assets, like properties, in planning
- Getting financial advice from people who lack a fiduciary responsibility to their clients
To get the most from your asset protection strategy, you should coordinate efforts between your financial, estate, and tax planning professionals. The ideal time to start is at least several years out from retirement, giving you time to maximize your income and savings toward your asset growth and retirement goals.
Work with fiduciary advisors, which means that they have a legal and ethical responsibility to make decisions in your best interest. They can show you how to protect your retirement savings now as markets plunge, without taking undue advantage of your worries.
Protecting What You’ve Built
Protecting your assets in retirement can feel overwhelming, especially if that time is right around the corner. Even if you feel behind the curve, you can still benefit from acting now.
Asset protection can support your financial independence and help you weather the oncoming storms, whether they come from higher healthcare costs, volatility in the market, gaps in insurance coverage, or a literal storm that causes damage to your home.
Starting early helps you get the most from your strategy. Asset protection involves a thorough analysis of your insurance, asset ownership, retirement savings and other investments, business risk, and long-term costs.
The best plan for you will take your current situation, your future needs, and your financial goals into consideration. It also combines your tax and estate planning to minimize confusion or complications over time.
To ensure that your asset protection and retirement strategies continue to meet your needs, you should review them regularly. As a long-term retirement planning partner, Brown and Company aims to help you create and maintain the ideal plan to protect your assets in retirement. Contact us to learn more.
Disclaimer: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.